A number of politicians are calling for taxing "windfall profits" driven by the "price bubble" in gasoline and oil. Previously, I narrow-mindedly opposed this, arguing that the whole point of the pricing signal being sent is to call for new supplies, which won't happen if the government takes the money away from suppliers.

I say narrow-mindedly, because I have had an epiphany. I realize now that it is indeed unfair for sellers to benefit from such a pricing bubble. However, I think the politicians are wrong for looking at oil, since that bubble is only small potatoes. I propose we start with the much bigger bubble: In housing prices. In a time of housing shortages, it pains my heart to Americans profiteering from artificially high prices. Besides, oil companies actually do something useful with their windfall profits, like finding more oil; home sellers will just blow their proceeds on a big screen TV or something.

My proposal is that the government set a "fair price" for housing, based on a standard rate of appreciation. The price of the house in a base year, such as 1970, adjusted for the CPI is a good starting point, but a process can be created modeled after Hawaiian gas pricing regulation to set up the exact standard. Every house in the country then will be appraised. Any house selling for or appraised for an amount above the 1970 price+CPI adjustment will be deemed as having reaped windfall profits. The government is authorized to seize 100% of these windfall profits. When this program is a success, we should then consider a retroactive program to seize windfall profits from the Internet stock bubble.

So, for all you who were supporting government intervention into gasoline pricing and profits, this must make you feel even better, since it is a much, much bigger bubble. Right? Or was it somehow more fun when Exxon was a target instead of, say, you?

Update: I thought it was obvious, but I guess not from the email I have gotten: I am being sarcastic here. I would oppose a "windfall" profits tax on oil, houses, Internet Stocks, Pokeman cards, or whatever.

We keep hearing the word "bubble" to describe
industries with rapid and unsustainable rising prices. Hence, the
Internet bubble, the telecom bubble, stock market bubble, and now, some
analysts believe, a housing bubble. Yet for some mysterious reason no
one speaks of the oil bubble -- though prices have tripled in two years
to as high as $70 a barrel.

Reviewing the history of oil-market boom and bust
confirms that we are in the midst of a classic oil bubble and that
prices will eventually fall, perhaps dramatically. Despite apocalyptic
warnings, the world is not running out of oil and the pumps are not
going to run dry in our lifetimes -- or ever. What's more, the
mechanism that will surely prevent any long-term catastrophic shortages
in energy is precisely the free-market incentive to make profits that
many politicians in Washington seem to regard as an evil pursuit and
wish to short circuit.

The best evidence for an oil bubble comes from the
lessons of America's last six energy crises dating back to the late
19th century, when there was a great scare about the industrial age
grinding to a halt because of impending shortages of coal. (Today coal
is superabundant, with about 500 years of supply.) Each one of these
crises has run almost an identical course.

First, the crisis begins with a spike in energy prices
as a result of a short-term supply shock. Next, higher prices bring
doomsday claims of energy shortages, which in turn prompts government
to intervene ineffectually into the marketplace. In the end, the advent
of new technologies and new energy discoveries -- all inspired by the
profit motive -- brings the crisis to an abrupt end, enabling oil and
electricity markets to resume their virtuous longterm downward price
trend.

The limits-to-growth crowd has predicted the end of
oil since the days when this black gold was first discovered as an
energy source in the mid-19th century. In the 1860s the U.S. Geological
Survey forecast that there was "little or no chance" that oil would be
found in Texas or California. In 1914 the Interior Department forecast
that there was only a 10-year supply of oil left; in 1939 it calculated
there was only a 13-year supply left, and in 1951 Interior warned that
by the mid-1960s the oil wells would certainly run dry. In the 1970s,
Jimmy Carter somberly told the nation that "we could use up all of the
proven reserves of oil in the entire world by the end of the next
decade."

We can ridicule these doom and gloom predictions
today, but at the time they were taken seriously by scholars and
politicians, just as the energy alarmists are gaining intellectual
traction today. But as the late economist Julian Simon taught, by any
meaningful measure oil (and all natural resources) has gotten steadily
cheaper and far more bountiful in supply over time, despite periodic
and even wild fluctuations in the market.

6 Comments

Marnee:

Pedro Bento:

Reminds me of Hayek's article - I think it was called "The Market for Ideas". In it, he compared the market for ideas, literature, speech - expression in general - to markets for goods, which the media, the literary community, university professors, etc., mostly thought should be regulated. Using their own arguments, Hayek made the case that the market for ideas was much more prone to failure than the market for goods, and should, therefore, be heavily regulated. Apparently, nobody thought this was very funny...